Buying a residential property from one’s own spouse does not, by itself, make the transaction a colourable device to avoid tax, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held, allowing a woman’s claim for exemption under Section 54F after she purchased a Mumbai property from her husband for Rs 7.5 crore.The tax tribunal held that the Income-tax (I-T) department could not deny the exemption merely on the basis of suspicion that the transaction between the spouses was designed to avoid tax, particularly when the transaction was carried out within the legal framework and the alleged business loss of the husband (which would help him set off the gains on sale of his flat against his losses) had arisen several months after the property transaction.The taxpayer had filed her return for the financial year 2020-21 declaring total taxable income of Rs 1.9 crore. Her gross income included long-term capital gains of Rs 8.31 arising from the transfer of unlisted shares. Against the capital gains, she claimed exemption of nearly Rs. 7 crore, under section 54F on account of investment in a residential property.This property based in a tony area of Juhu was purchased from a sole proprietorship concern of her husband for a sum of Rs 7.50 crore. The deed of transfer was dated March 30, 2021, registered on June 30, 2021, and the consideration was paid on May 27, 2021.She stated that the property she purchased was different from the house in which she was residing. She said the house she currently lived in was her husband’s parental property and that the newly purchased property was acquired for her future security and was intended to be let out. She also explained the sources of funds used for the investment.The tax dispute arose because the property was purchased from her husband. The I-T officer noted that the husband had reported short-term capital gains of about Rs 4.8 crore from the sale of the property and had set off part of those gains against business losses of about Rs 3.5 crore. The I-T officer therefore took the view that the spouses had entered into an arrangement to avoid tax, with the wife claiming Section 54F exemption while the husband adjusted the short-term capital gain against business losses. Thus, he disallowed the entire section 54F claim and added the amount of nearly Rs. 7 crore to her taxable income. This was upheld by the Commissioner (Appeals).Before the ITAT, the taxpayer argued that the transaction was genuine, duly registered and supported by payment of applicable stamp duty and actual consideration. She also pointed out a crucial chronology: the property transaction took place in June 2021, whereas the business loss in her husband’s hands arose only on March 31, 2022. Therefore, she argued, the loss could neither have accrued nor been anticipated when the property was purchased.The tax tribunal found merit in the argument. It further noted that the husband had not set off the entire short-term capital gain against the business loss; only part of the gain had been set off. The ITAT therefore held that the set-off was in the normal course of business and that the transactions between the spouses could not be termed a colourable device merely because they resulted in a tax benefit. In coming to its decision, it also relied on judicial precedents.The Mumbai ITAT bench held that a deduction claimed cannot be denied merely because a transaction is between relatives or related parties, where the transaction itself is permissible and has not been shown to be artificial or sham.“The allowable deduction to assessee (taxpayer) cannot be denied only on the ground of doubt or surmise that the transaction was an artificial transaction for the purpose of tax evasion,” the tax tribunal concluded.
